Essay on Pricing Problem: Long-Term Investment Decisions

The low-calorie, frozen, microwavable food company is currently experiencing a pricing problem, making it hard to reach the required amount of profit from the sales. The recent increase in the cost of products required by the company is likely to negatively affect the company and therefore a solution is required. The company therefore needs to find a way of addressing the pricing situation without decreasing the demand which limits the company from increasing the prices of the products they produce (De Graue, 2014). The company should use other pricing strategies such as variating the prices in their products as this gives the customers more choices rather than using similar prices for almost all prices. The company should also use the price anchoring technique by placing a standard product next to a premium product. The customers will easily buy the standard product because of its affordability. Bundle pricing will increase the number of sales in the company as it is a good way of selling foods that would otherwise go bad if unsold at a lower price (Atkinson & Stiglitz, 2015). It also increases the number of customers by thinking that they are getting free food. Using psychology pricing methods such as setting prizes to amounts such as $99 rather than $100 is also more likely to increase the number of sales in the company.

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Setting high prizes for newly invented products that are required in the market and then gradually lowering the prize depending on the competition from other companies is also a solution to the problem (De Graue, 2014). The government has established many rules to guide businesses. Businesses therefore have to continuously change their operation methods according to the changes made in the rules and regulations. The government has the ability to catalyze the market by enforcing laws that change the business environment. For example, imposing more taxes on a particular sector will not encourage investors to invest on that area while lowering the taxes in another area encourage investments.

Highly taxing imported products encourages domestic production and vice versa. Politically stable countries are likely to make business friendly decisions thus encouraging local business and attracting foreign investors while unstable political systems reflects on the inability of the government to observe law and order thus discouraging business (Vogel, 2014). The governments rate of spending also affect businesses since overspending will lead to an increase in the taxation rate because the government gets money from taxes. An increase in the rate of taxation discourage investments especially from entrepreneurs. Excessive spending also decreases the amount of savings thus limiting private investment which leads to a decrease in the amount of produced goods and finally loss of jobs (De Graue, 2014). The government can also enforce laws on interest rates.

Raising the interest rates increases the borrowing cost in the business world and also reduces the consumer spending rate while lowering the interest rate leads to an increase in production which attract more investments (Ehrenberg & Smith, 2016). It can also affect the interest rate by printing more money which causes inflation which is not good for business. Businesses spend lots of money in an attempt to abide by the regulations which at times are ineffective. Some of the regulations include requirement for licenses, the minimum wage and conduction of periodic health inspections in all restaurants. Effective regulations however promote the growth of businesses. Some of these government policies are likely to have positive effects in the company (Atkinson & Stiglitz, 2015). For example, certification from the health institutions is likely to boost the sales in the company because the customers will be assured that the food is being handled properly although the company spends a lot of money for the inspections.

However, regulations such as the federal minimum wage for every employee in the company affects the company negatively since there are certain designations in the company such as washing the plats that do not require a minimum wage payment (Ehrenberg & Smith, 2016). Lowering the interest rates will encourage borrowing incase the company has a problem in the future hence will help keep the business going while raising the interest will have a vice versa effect on the company. The company is likely to thrive in a politically stable environment because this means that the country and the economy will be business friendly hence attracting more local customers which will in turn attract foreign customers (Vogel, 2014). A stable market and economy will enable the company to grow continuously with the elimination of problems such as an increase in taxes in the ingredients required by the company. Excessive spending by the government is likely to paralyze the business because an increment in the payable tax to the government extracts money from the company.

The company requires the government regulations that ensure fairness because the government has a body that regulates the prices of commodities in the market. Without regulation of products, all companies and distribution bodies are likely to hike the prices of product unreasonably (Ehrenberg & Smith, 2016). This will create a tremendous instability in the market thus disabling business in the country. The government therefore intervenes in the market mainly for equality purposes. The government is in charge of equally distributing resources in the country hence giving everyone an equal opportunity in the economy. The governments intervention also prevents market failure by subsidizing goods with positive externalities. This is because the entrepreneurs in a country may fail to account for both the positive and negative externalities (Ehrenberg & Smith, 2016). This way, they take action on companies that tend to have monopoly of power by regulating the prices of the products these companies produce.

The government also has a mandated role of reducing the rate of unemployment in the country and they therefore have to intervene to overpower the prolonged recessions. Examples of companies that have experienced the importance of government intervention include the Dairy farming sector (Atkinson & Stiglitz, 2015). Most companies put their investment and reputation at stake by taking a major, capital-intensive project mainly because of the increased transparency in the market in case things go wrong. Capital investment is mainly used by companies that aim to expand their level of operation. It is mainly accomplished through getting fixed assets by buying the required products that will ensure a successful investment and also balance the capital investment (Vogel, 2014). This method of expansion has many complexities hence involves taking so much risk. Obtaining the amount of finance required to fund such a project and having an efficient capital budget of the project is a major complexity. Hence, analyzing the project in question is important in determining the amount of return the project will achieve. The project itself may also be a risk because of the uncertainty of the project being profitable. This type of risk is mainly heightened when the company invests in a different area of expertise.

Another complexity involved in capital investment is the market risk. This risk mainly covers macroeconomic factors like the interest rates and inflation. It also entails exchange rates and the political stability of the country. An unstable political situation is likely to cause unrest hence disabling the investment and likewise, if the rates of money exchange is unfavorable, the company will lose a large amount of money (De Graue, 2014). Local companies do not experience the exchange-rate risk but can also suffer large losses when the prices of items increase with a significant amount. To minimize the many risks involved in capital investment, the company needs to have a strong governing structure. This enhances accountability at all stages of the investment hence making people at both the operational level and the managerial level account for every action they take. This allows for an accurate comparison and helps to make large investment decisions because of the integration of the risks involved.

Other risk modelling practices that help in minimizing the amount of risks involved include documenting the risk analysis procedures, performing quality control assessments to ensure the products used and produced are of good quality (Ehrenberg & Smith, 2016). Such also help in enhancing the accuracy of the models, evaluating the estimated projections and the actual ones, establishing a methodology for project scoring to take into account the technical and geographic differences of the project thus determining the best project to invest in and finally creating and updating a project risk register (Atkinson & Stiglitz, 2015). To make the model more competent, risk budgets should be analyzed in every stage of the investment process.

A conflict is likely to develop in the company between the shareholders and the managers regarding critical decisions affecting the company (Atkinson & Stiglitz, 2015). Managers are usually in charge of making important decisions that bring more profits to the company while shareholders are in charge of the finance that turn the decisions into actions. The shareholders therefore have to agree with the managers decision to make the plan successful. The company can therefore create a convergence between the interests of the manager and the shareholder mainly by giving out a clear definition of the job description of each party. When the roles are well known, there is a possibility that there will be no conflict between the two (De Graue, 2014). The company should also hire a person fit for the managerial position in the company; one that is knowledgeable and experienced in the food market. This is because a good manager will have good ideas for the good of the company thus reducing interactions with the shareholder.

Having a reasonable and open minded shareholder also goes hand in hand in resolving the conflict between the two. Decisions regarding bringing more profits to the company should be made by the manager (De Graue, 2014). Such is because managers are fully knowledgeable on matters concerning the market due to their interactions with other managers and other employees unlike shareholders who are often attracted to short term profits. A good relationship between the manager and the shareholder enhances investments in the company. This is because the shareholders are more likely to trust a manager that they are in good terms with as compared to a manage that they are in constant quarrels with (Vogel, 2014). Hence it is important for the manager to engage well with the shareholder as it increases profits in the company

References

Atkinson, A. B., & Stiglitz, J. E. (2015). Lectures on public economics. Princeton University Press.

De Grauwe, P. (2014). Economics of monetary union. Oxford university press.

Ehrenberg, R. G., & Smith, R. S. (2016). Modern labor economics: Theory and public policy. Routledge.

Ehrenberg, R. G., & Smith, R. S. (2016). The economics of labor force participation. Princeton University Press.

Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge University Press.